US securities regulator unveils legal framework for digital coin offerings

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US securities regulator unveils legal framework for digital coin offerings

Plans to let firms offer, sell tokens under securities laws.

Technology trading startups may be exempted from current securities law restrictions to raise capital using digital currencies or “tokens,” a top US financial regulator proposed on Thursday, but a transition plan would be required after three years.

The plan must show whether those products can continue to be traded as securities, or if they change characteristics over time and no longer meet that definition, said Hester Peirce, a US Securities and Exchange Commissioner, at an industry conference in Chicago.

The long-awaited proposal to consider allowing blockchain companies to issue Initial Coin Offerings (ICOs) came after the SEC repeatedly said the tokens can be considered securities and are subject to the same safeguards required in traditional securities sales.

A blockchain is an online ledger of transactions maintained by a network of computers, which gained prominence as the technology that underpinned digital currencies such as bitcoin.

Peirce’s proposal is subject to public consultation before the SEC issues a formal measure.

The plan calls for a three-year window for firms to develop a network that allows for tokens “to be distributed to and freely tradable by potential users, programmers and participants in the network,” while preserving important protections for token purchasers.

ICOs have become a bonanza for digital currency entrepreneurs, allowing them to raise millions quickly by creating and selling digital tokens with no regulatory oversight.

The proposal aims to provide a legal framework for blockchain firms to offer and sell tokens under federal securities laws, while also determining whether a separate “decentralized” network would be better suited for these products after three years.

The plan would require firms to issue disclosures tailored to the needs of token purchasers. They would include information about the source code and a development plan, as well as an initial development team that assesses the nature of the tokens after three years, Peirce said.

Technology platforms must also disclose applicable anti-fraud provisions and clarity on when a token transaction constitutes a securities transaction at the end of the three-year period. 

“I see this proposal as a path forward that achieves the objective of getting token purchasers the information they need, but it is also just a sketch - a work in progress - that requires productive engagement from the public,” Peirce told Reuters.

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